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Thursday, December 8, 2011

Rosenberg - Forward S&P P/E Is About 13X, v. 11X Consensus

The consensus sees $108 of operating EPS for 2012 for the S&P 500, up from $99 this year. Europe is heading into a recession and the banks there account for one-third of global trade finance. So this will likely drag many emerging market countries along for the ride too.
An estimated 40% of S&P 500 sales come from abroad. What was a tailwind for the past two years is about to become a serious headwind.
National account earnings represent one-third of profits, so it would stand to reason that the more globally oriented S&P 500 would have profits at 40%, similar to sales. Looking at prior global downturns, it is common to see U.S. corporate profits from abroad decline 20% even if U.S. GDP manages to stay in some oasis. Even in the worst part of the Asian crisis in 1998, earnings from overseas operations slid 13% as “real GDP” that year expanded by more than 4%.

A European recession alone would shave about $4 from EPS and if it morphed into a broader turndown that affects Asia and other parts of the globe then the aggregate hit could be as much as $8 — assuming that the Eurozone recession spreads to other non-US profit sources and a downturn abroad is a typical 20% haircut from a 40% chunk of profits (the foreign-sourced part) — we have seen there are significant signs of slowing not just in emerging Asia of late but in LatAm too. Now we are talking about playing way at the back tees in next year’s golf game — strip out $8 a share right away from the starting point of say, $98. To get to the consensus $108 figure, we are going to have to see 20% domestic earnings growth, which is simply not in the cards — not with a limp economy (possibly a recession but something perhaps between 1% and 2% at best) and margins already at record highs. At best flat, perhaps up a few dollars to account for share buybacks, but we are left with something say closer to $95 for operating EPS for 2012 than $108. Therefore, instead of a forward multiple of just over 11x on a consensus basis, it could well be that the actual multiple is closer to 13x at this time. 

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